August 5, 2020
20% increase to our price target
Following FCMB’s Q2 earnings which surprised positively, we have increased our new price target by 20% to N3.42; this implies a potential upside of c.77% from current levels. In addition to the positive surprise on both revenue lines, earnings received a boost from a positive result of N6.8bn in other comprehensive income (OCI). As such, we have upgraded our 2020E EPS forecast by c.56%. However, the upward revision to our 2021E EPS forecast is modest at 5%.
Thanks to the regulatory forbearance on loan restructurings, cost of risk remained relatively stable q/q at c.2.0%. Management disclosed that about 40% of its loan book – mostly oil and gas (c.17%) and manufacturing (7%) – is being restructured. Looking ahead, management sees a brighter outlook for credit performance on the back of the gradual pick-up in economic activity following the lifting of the lockdown. Despite the magnitude of restructuring, we believe that the market’s current valuation of the stock – 2020E P/B multiple of 0.17x (for 2021E ROAE of 8.8%) – is too bearish and is at a significant discount (64%) to the 0.48x (for 16.3% ROAE) that our universe of bank stocks is trading on.
Although the 0.31x 2020E P/B multiple implied by our price target is higher than what the market is valuing the stock on, it is still at a lower discount of c.36% to the sector. Despite the sizable upside potential implied by our price target, we retain our Neutral rating because of (i) potential downside risks by way of asset quality deterioration and a possible rise in credit impairments given the sizable proportion of loans being restructured, and (ii) weaker liquidity buffers relative to peers – liquidity ratio of 32.2 vs regulatory minimum of 30%.
Q2 PAT up strongly y/y, driven by solid growth in revenues & OCI
FCMB’s pre-provision profits advanced by 13% y/y, driven by growth of 11% y/y and 16% y/y in funding and non-interest income respectively. While the y/y improvement in funding income was driven by a 60bp y/y expansion in net interest margin to 8.0% (H1 2020), the double-digit growth in other income was underpinned by an fx gain of N1.9bn (vsN488m in Q2 2019) and a 48% y/y increase in trading income (mainly bonds and fx).
On the back of these, PBT expanded by 25% y/y. Also, PAT accelerated by 209% y/y, thanks to the OCI. Sequentially, PBT grew modestly by 4% q/q. PAT was up by triple digits, because of the robust performance on the OCI line.